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Passed
by Congress in 1977, the Community Reinvestment Act (CRA) states that
“regulated financial institutions have continuing and affirmative
obligations to help meet the credit needs of the local communities in
which they are chartered.” The act then establishes a regulatory regime
for monitoring the level of lending, investments, and services in low-
and moderate-income neighborhoods traditionally underserved by lending
institutions. Examiners from four federal agencies assess and “grade” a
lending institution’s activities in low- and moderate-income
neighborhoods.

If a regulatory agency finds
that a lending institution is not serving these neighborhoods, it can
delay or deny that institution’s request to merge with another lender
or to open a branch or expand any of its other services. The financial
institution regulatory agency can also approve the merger application
subject to specific improvements in a bank’s lending or investment
record in low- and moderate-income neighborhoods.

In
the spring of 1995, the federal agencies released new CRA regulations.
The regulations outline how federal agencies are to assess the
activities of lending institutions in traditionally underserved
neighborhoods. The federal agencies conducting CRA examinations are:
the Office of the Comptroller of the Currency (http://www.occ.gov) that
examines nationally chartered banks, the Office of Thrift Supervision
(http://www.ots.treas.gov) that examines savings and loan institutions,
and the Federal Deposit Insurance Corporation (http://www.fdic.gov) and
the Federal Reserve Board (http://www.federalreserve.gov) - both of
whom examine state chartered banks.

The CRA
regulations had been revised as part of the Clinton administration’s
initiative to create performance-based and objective standards. The new
regulations attempt to satisfy community activists by focusing more
attention on the lending, investment, and service records of banks. The
regulations also attempt to reduce the amount of paperwork required of
lending institutions. Gone are previous paper trail generating
requirements such as documenting participation by a bank’s board of
directors in reviewing CRA compliance. In their place, are examinations
that are suppose to flexibly assess lending activities in low- and
moderate- income neighborhoods of institutions of various financial
capacities.

The CRA regulation establishes
various tests for lending institutions of different sizes and a
strategic plan option. Under each test, examiners rate banks according
to their lending records and responsiveness to community needs. Banks
receive a score based on their evaluations of “outstanding”,
“satisfactory”, “needs to improve”, or “substantial non-compliance.”
The last two scores can result in delays or denials of mergers,
acquisitions, or expansions of services.

Lending
institutions with assets greater than $1 billion are subjected to the
most rigorous exams. They are evaluated under a lending test that
considers the number and percentages of loans made to low- and
moderate-income individuals and communities. Likewise, they are
evaluated under an investment test and a service test that consider,
respectively, the number and types of investments and services
(branches and bank accounts) in low- and moderate-income communities.
When conducting the evaluations, examiners are to consider the
“performance context” of the lending institutions. In other words,
examiners are advised to consider factors such as the business
opportunities available to a lending institution and the size and
financial condition of the lending institution.

In
2005, the federal agencies established a streamlined exam for
“intermediate small banks” defined as institutions with assets of $250
million to $1 billion (the asset range is adjusted annually to take
inflation into account). These intermediate small banks or mid-size
banks undergo a lending test and a community development test. The
community development test incorporates elements of the large bank’s
investment and service test. The community development test scrutinizes
the amount and responsiveness of a mid-size bank’s community
development lending, investing, and services. Unfortunately, the
mid-size banks are no longer required to report small business or
community development lending data.

Small banks,
as defined as institutions with less than $250 million in assets, are
evaluated under a test less encompassing than the evaluation for their
larger counterparts. Small banks are not subjected to an investment and
service test. Their lending test consists of the following five
criteria: a “reasonable” loan-to-deposit ratio, the percentage of loans
in the bank’s assessment area, the bank’s distribution of loans to
individuals of different income levels and businesses and farms of
different sizes, the geographic distribution of loans, and the bank’s
record of responding to written complaints about its lending
performance in its assessment area.

The
Gramm-Leach-Bliley Act of 1999 established a less frequent exam cycle
for small banks of under $250 million in assets with passing CRA
ratings. Small banks with outstanding ratings will be examined once
every five years and those with satisfactory ratings will be examined
once every four years. Banks with passing ratings can be examined more
frequently if regulatory agencies believe a compelling reason, such as
deteriorating CRA performance, makes it necessary to do so. Community
groups should contact the regulatory agencies if they believe that a
particular small bank should be examined before its lengthened time
cycle.

Wholesale and limited purpose banks are
also assessed under a test tailored to their capabilities. These banks
provide services such as offering credit cards or specialize in large
commercial deposits. Lending tests cannot adequately assess wholesale
and limited purpose banks because many of them do not accept consumer
deposits or make home loans. Instead examiners are to focus their
evaluation of these banks on the number of community development loans
and investments (such as affordable housing rehabilitation loans,
low-income housing tax credits, or investments in organizations that
finance small businesses). The tests for mid-size and large banks also
consider community development loans and investments.

Any
lending institution can opt for developing a strategic plan in lieu of
a regulator evaluation. Developed in conjunction with neighborhood
organizations, a strategic plan seeks to satisfy the credit needs of a
bank’s assessment area and must address the lending, investment, and
service criteria that would have been part of the usual evaluation.
Federal regulators must approve the strategic plan and rate it at least
“satisfactory.” If a bank receives a lower rating on its plan, it has
the option of submitting to the applicable tests for large, small, or
limited purpose banks.

A CRA rating can be
downgraded if a federal agency uncovers evidence of illegal, abusive or
discriminatory lending on fair lending exams that occur at about the
same time as CRA exams. Community groups should bring fair lending
concerns to attention of CRA examiners.

In
addition to the strategic plan option, community groups can be involved
in the CRA evaluation process. Federal agencies publish in advance a
list of banks that will be evaluated each quarter. Once every three
months, NCRC notifies its members about the banks scheduled for
upcoming CRA exams. NCRC encourages its members and other neighborhood
organizations to offer their comments on the CRA performance of banks
in advance of their examinations. Timely comments can influence a
bank’s CRA rating by directing examiners to particular areas of
strength or weakness in a bank’s lending, investments, or services in
low- and moderate-income neighborhoods. A community group’s comment can
have an influence on the overall CRA rating for an institution or the
CRA rating for a state or one of the tests on the CRA exam. Even
changing a rating from Outstanding to Satisfactory in one state or one
part of the exam can motivate a bank to increase the number of loans,
investments, and services to low- and moderate-income communities.

Also,
community organizations can offer written comments on a bank’s CRA and
fair lending performance when a bank has submitted an application to
merge or acquire another bank or thrift. NCRC can assist community
organizations in preparing comments on merger applications. The vast
majority of merger applications are approved, but comments can still
direct regulatory agencies’ attention to areas of weakness. The federal
agency can approve the merger application, but still indicate in the
approval order that the bank should improve upon its area of weakness.
In addition, the bank can pledge in writing to address its shortfall by
implementing a fair lending reform and/or increasing its lending,
investing, and services to traditionally underserved communities.